Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

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arcticpineapplecorp.
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Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by arcticpineapplecorp. »

good article here:
The economists' first big finding is that these financiers are real whizzes when it comes to buying stocks. They've got skills that could justify charging clients high fees. The average stock they choose to buy outperforms the random dart-throwing monkey by 1.2 percentage points. That might not seem like a lot, but, with the power of compound interest, it really adds up over time. It makes these investors rockstars in the world of finance. They're earning those Bugattis.

But then the economists looked at these investors' performance when selling stocks. It turns out they're bad, much worse than the monkey. The stocks the investors sold ended up going up in value faster than the stocks they decided to keep. If their clients had instead hired the monkey with darts to randomly choose which stocks to sell, the clients' portfolios would have earned 0.8 percentage points more per year. Again, that is a huge amount in the world of finance. Goodbye Bugatti, hello Ford Focus.
https://www.npr.org/sections/money/2021 ... -investing
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MahoningValley
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by MahoningValley »

Isn't this the Boglehead's raison d'etre? :sharebeer
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by nisiprius »

The article says "And the basic theory they land on is these investors spend much more brain energy on buying stocks than selling them." it is easy to infer that asset managers could, in fact, beat the market if only they focussed more on the selling decisions.

But it is at least possible that the situation isn't symmetrical. It's like the riddle: when parallel parking, why is it harder to pull in than to pull out. On a logical, rational, physics level the two operations are inverses. Any series of steering wheel, brake, and accelerator actions that will pull you out will, if reversed, pull you in. The answer is probably that "pulling out" represents a much larger and broader range of acceptable outcomes than "pulling in."

Another problem is whether you can use deliberative system 2 and make a deliberative decision to quit using System 1. Of course we see this in the forum when people say that some issue is "just" psychological, or "just" behavioral, as if we could avoid behavioral errors simply by deciding not to make behavioral errors.
Last edited by nisiprius on Tue Aug 03, 2021 1:06 pm, edited 2 times in total.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by lassevirensghost »

Interesting nuance in the case for indexing.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by retiringwhen »

nisiprius wrote: Tue Aug 03, 2021 7:31 am Another problem is whether you can use deliberative system 2 and make a deliberative decision to quit using System 1. Of course we see this in the forum when people say that some issue is "just" psychological, or "just" behavioral, as if we could avoid behavioral errors simply by deciding not to make behavioral errors.
One of the wisest things Jack Bogle ever said was "Don't do something! Just Stand there!" It is the core tenet that addresses the system 1 reactions. We all know it is by far the toughest one too. I have been devising strategies to strangle my inner desire to do something for decades with only moderate success. The only way to quit system 1 is to have prepared for as many potential events as possible ahead of time to put a deliberate system in place to fend off the fight or flight reaction.
Last edited by retiringwhen on Tue Aug 03, 2021 10:28 am, edited 1 time in total.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by edgeagg »

investing is hard: It is hard to just stand there or not run away from the bear :D
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by 02nz »

This is basically a version of the frequent refrain on this site - to get market timing right, you have to be right twice, once buying and once selling.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by livesoft »

I was struck by this:
And they decided to compare them to the simplest alternative investment strategy they could think of, "which is almost literally throwing a dart at a list of the names that exist in their portfolio and buying or selling that instead of the company that the investor actually chose to buy or sell," Schmidt says. In other words, it's fancy-schmancy financier vs monkey randomly throwing darts.
That is, the comparison was not to a portfolio of index funds, but was to a monkey throwing darts. Sigh! Of course, it is possible that the NPR write-up did not faithfully report what was in the actual paper.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by nedsaid »

arcticpineapplecorp. wrote: Tue Aug 03, 2021 6:59 am good article here:
The economists' first big finding is that these financiers are real whizzes when it comes to buying stocks. They've got skills that could justify charging clients high fees. The average stock they choose to buy outperforms the random dart-throwing monkey by 1.2 percentage points. That might not seem like a lot, but, with the power of compound interest, it really adds up over time. It makes these investors rockstars in the world of finance. They're earning those Bugattis.

But then the economists looked at these investors' performance when selling stocks. It turns out they're bad, much worse than the monkey. The stocks the investors sold ended up going up in value faster than the stocks they decided to keep. If their clients had instead hired the monkey with darts to randomly choose which stocks to sell, the clients' portfolios would have earned 0.8 percentage points more per year. Again, that is a huge amount in the world of finance. Goodbye Bugatti, hello Ford Focus.
https://www.npr.org/sections/money/2021 ... -investing
Ahhh. The "Nedsaid effect" strikes again. In another thread, I explained this effect and someone pretty much told me that I didn't know what I was talking about. Yes, the effect is real and professional investors are not immune.

The "Nedsaid effect" is the effect of incorrect sell/buy decisions. By a ratio of 2:1 or even 3:1, what you sell tends to outperform what you buy to replace at least in the shorter run. There are some reasons for it, much of it is performance chasing. Value stocks are associated with negative momentum so they tend to keep going down in Value for a while after you purchase them. Value investors have experienced this. Growth investors can experience this if they are performance chasing.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by skierincolorado »

livesoft wrote: Tue Aug 03, 2021 10:38 am I was struck by this:
And they decided to compare them to the simplest alternative investment strategy they could think of, "which is almost literally throwing a dart at a list of the names that exist in their portfolio and buying or selling that instead of the company that the investor actually chose to buy or sell," Schmidt says. In other words, it's fancy-schmancy financier vs monkey randomly throwing darts.
That is, the comparison was not to a portfolio of index funds, but was to a monkey throwing darts. Sigh! Of course, it is possible that the NPR write-up did not faithfully report what was in the actual paper.
A monkey throwing darts should perform comparably to an index fund in the average, given a large enough sample.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by vanbogle59 »

arcticpineapplecorp. wrote: Tue Aug 03, 2021 6:59 am good article here:
Agree
arcticpineapplecorp. wrote: Tue Aug 03, 2021 6:59 am the clients' portfolios would have earned 0.8 percentage points more per year. Again, that is a huge amount in the world of finance. Goodbye Bugatti, hello Ford Focus.
Disagree.

It just means you don't get as big a Bugatti as you could have.
There is no loss.

If it really is possible to add 1.2% per year with active management, at a cost of < 1.2% per year, then bring it on.
Who cares if active management buying plus monkey selling would been 2% per year?
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by Dregob »

arcticpineapplecorp. wrote: Tue Aug 03, 2021 6:59 am good article here:
The economists' first big finding is that these financiers are real whizzes when it comes to buying stocks. They've got skills that could justify charging clients high fees. The average stock they choose to buy outperforms the random dart-throwing monkey by 1.2 percentage points. That might not seem like a lot, but, with the power of compound interest, it really adds up over time. It makes these investors rockstars in the world of finance. They're earning those Bugattis.

But then the economists looked at these investors' performance when selling stocks. It turns out they're bad, much worse than the monkey. The stocks the investors sold ended up going up in value faster than the stocks they decided to keep. If their clients had instead hired the monkey with darts to randomly choose which stocks to sell, the clients' portfolios would have earned 0.8 percentage points more per year. Again, that is a huge amount in the world of finance. Goodbye Bugatti, hello Ford Focus.
https://www.npr.org/sections/money/2021 ... -investing
1.2 percentage points looks less impressive if you subtract a fee of 1.0 (they are not doing this for free)!
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by Fallible »

livesoft wrote: Tue Aug 03, 2021 10:38 am I was struck by this:
And they decided to compare them to the simplest alternative investment strategy they could think of, "which is almost literally throwing a dart at a list of the names that exist in their portfolio and buying or selling that instead of the company that the investor actually chose to buy or sell," Schmidt says. In other words, it's fancy-schmancy financier vs monkey randomly throwing darts.
That is, the comparison was not to a portfolio of index funds, but was to a monkey throwing darts. Sigh! Of course, it is possible that the NPR write-up did not faithfully report what was in the actual paper.
FWIW, the article refers many times to a monkey "randomly" throwing darts (similar to Burton Malkiel's "blindfolded monkey"), which always make me wonder: does a monkey have to be throwing randomly or be blindfolded to make the point? Its a monkey, right?
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by Fallible »

Enjoyed the article and not surprised at Schmidt's comment:
And so, Schmidt, who has long ascribed to the traditional economic view that investors trade stocks rationally, appears to have lost the fight that originally inspired this study. "My big takeaway from this paper is even when we look at a sample of extremely talented, highly incentivized expert investors, they are still people," Schmidt says.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by afan »

Randomly picking stocks would not be expected go generate the same returns as a cap weighted index. The random volume of shares purchased would be close to an equally weighted index, if all purchases were for the same dollar amounts. If the dollar amounts were random then one would not expect this approach to be the same as either cap weighted or equal weighted.

There is no discussion of risk adjusted returns. The big investors may have simply shifted towards high volatility stocks.

Hard to know what they really did without seeing the paper.

We don't know what fees they were charging. Some institutional investors will charge big clients well under 1%. Hedge funds typically charge much more. Beating the market by 0.188% gross is not much of an accomplishment is you are charging 2-5% of assets for the service. Even worse if the advisor keeps a share of the profit.

I wonder how many of these big clients know that there are institutional share classes of Vanguard Total Stock Market with near zero fees, negative when you include lending revenue.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by vanbogle59 »

Fallible wrote: Tue Aug 03, 2021 11:51 am FWIW, the article refers many times to a monkey "randomly" throwing darts (similar to Burton Malkiel's "blindfolded monkey"), which always make me wonder: does a monkey have to be throwing randomly or be blindfolded to make the point? Its a monkey, right?
My first job was to sell snow cones in front of the monkey cages at a zoo.
For that entire summer, I only ever saw the monkeys throw one thing.
Not a throw really. More of a fling.
They did it when the visitors got close enough to hit. Smart little boogers.

My guess is that the visitors would have preferred getting hit by a dart.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by Candor »

vanbogle59 wrote: Tue Aug 03, 2021 3:30 pm
Fallible wrote: Tue Aug 03, 2021 11:51 am FWIW, the article refers many times to a monkey "randomly" throwing darts (similar to Burton Malkiel's "blindfolded monkey"), which always make me wonder: does a monkey have to be throwing randomly or be blindfolded to make the point? Its a monkey, right?
My first job was to sell snow cones in front of the monkey cages at a zoo.
For that entire summer, I only ever saw the monkeys throw one thing.
Not a throw really. More of a fling.
They did it when the visitors got close enough to hit. Smart little boogers.

My guess is that the visitors would have preferred getting hit by a dart.
I have no memory of it but apparently when I was a toddler on my fathers shoulders at the zoo a well aimed monkey relieved itself on the two of us though the cage. Monkeys can be deceivingly accurate.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by manuvns »

only buy never sell , may be re-balance or borrow
Thanks!
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by grabiner »

livesoft wrote: Tue Aug 03, 2021 10:38 am I was struck by this:
And they decided to compare them to the simplest alternative investment strategy they could think of, "which is almost literally throwing a dart at a list of the names that exist in their portfolio and buying or selling that instead of the company that the investor actually chose to buy or sell," Schmidt says. In other words, it's fancy-schmancy financier vs monkey randomly throwing darts.
That is, the comparison was not to a portfolio of index funds, but was to a monkey throwing darts. Sigh! Of course, it is possible that the NPR write-up did not faithfully report what was in the actual paper.
I checked the actual paper. The comparison was to a random stock in the portfolio (not in the whole market, because these portfolios are relatively concentrated), and returns were factor-regressed. Thus, when the manager bought a stock, that stock had a factor-regressed future return better than the average stock the portfolio already held. When she sold a stock, that stock had a factor-regressed return better than the average stock that she could have sold.

One other note: when the sale was on the day of an earnings announcement, the disadvantage went away; buys and sells on such days both outperformed the market.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by jginseattle »

vanbogle59 wrote: Tue Aug 03, 2021 3:30 pm
Fallible wrote: Tue Aug 03, 2021 11:51 am FWIW, the article refers many times to a monkey "randomly" throwing darts (similar to Burton Malkiel's "blindfolded monkey"), which always make me wonder: does a monkey have to be throwing randomly or be blindfolded to make the point? Its a monkey, right?
My first job was to sell snow cones in front of the monkey cages at a zoo.
For that entire summer, I only ever saw the monkeys throw one thing.
Not a throw really. More of a fling.
They did it when the visitors got close enough to hit. Smart little boogers.

My guess is that the visitors would have preferred getting hit by a dart.
It's not hard to guess what was thrown.

And you certainly don't want that landing on a snow cone!
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by hi_there »

So, to roughly summarize the study's findings:

1) Stocks that active managers Bought outperformed randomly selected stocks.
2) Stocks that active managers Sold outperformed randomly selected stocks.

Indeed, it is likely that stocks that are brought to attention for action by active investors, either through news or by investment bank research, are going through some kind of event or volatility. Therefore, these stocks could have slightly higher returns to compensate investors for additional risk during that time.

The article attempts to explain this by guessing that Buy decision are logical and Sell decisions are emotional. This makes some sense, as unlike when Selling, when Buying, you have no skin in the game, and no existing position that might cause emotional and behavioral biases.
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Re: Why Even The Most Elite Investors Do Dumb Things When Investing--NPR

Post by grabiner »

hi_there wrote: Tue Aug 03, 2021 11:31 pm So, to roughly summarize the study's findings:

1) Stocks that active managers Bought outperformed randomly selected stocks.
2) Stocks that active managers Sold outperformed randomly selected stocks.
Note that in both cases, the managers also outperformed their benchmarks, so the stocks that they held outperformed randomly selected stocks, but not by as much as either the ones they bought or the ones they sold.
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